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Stop Worrying About 'Currency Wars'

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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John Maynard Keynes memorably noted how often people who consider themselves practical are really "the slaves of some defunct economist." Outdated or misremembered economic history, it turns out, can also hold us in thrall.

Some practical people these days are fretting about "competitive devaluation" or "currency wars." The concern is that countries are engaged in a zero-sum game of devaluing their currencies to boost their net exports. This game can't help the world as a whole because the net exports of all countries have to add up to zero (excluding any trade with space colonies). "For every winner, there's a loser," writes Alen Mattich in the Wall Street Journal, though he allows that this may be true only in the short term.

Economic officials in several countries, notably Brazil and China, criticized the Federal Reserve's bond-buying program in 2010 for boosting the U.S. economy at others' expense. More recently, Japan's central bank has faced the same accusation.

Lurking behind this concern is a memory of the 1930s, when competitive devaluation supposedly made the Great Depression worse. Steve Forbes is among those who look back at the "beggar-thy-neighbor" currency policies of the time and shudder ("a calamity").

The economist Barry Eichengreen has been challenging this historical understanding for decades. He summarized his case in 2009:

In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.

Eichengreen was still at it in 2013, calling fear of currency wars "the meme that will not die."

In the depressed conditions of recent years, expansionary monetary policies that cause currencies to devalue seem to have helped both the countries that undertook them and other countries. The International Monetary Fund concluded that the "spillover effects" of the first round of quantitative easing in the U.S. were positive. If the Federal Reserve had followed a monetary policy as tight as the European Central Bank's, our economy would be performing as poorly as the euro area -- and Europe wouldn't be better off for our joining its misery.

Investors seem to grasp that in present circumstances looser money that devalues currencies can be a positive-sum game. Scott Sumner, a professor of economics at Bentley University, points out that in recent years monetary easing in one country has tended to boost stocks in others. (Here's the lead to a 2010 story: "U.S. stock futures are rising, following world markets higher after the central bank of Japan moved to weaken the yen.") That's the exact opposite of what you'd expect if you believed the prevailing story about competitive devaluation.

So relax: The "currency war" doesn't seem to be claiming any casualties.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor on this story:
Timothy Lavin at tlavin1@bloomberg.net